Loan/Spousal Consent

[Gilmore]

A 401(k) plan allows for loans and also allows annuities as a distribution option.

Is spousal consent required if the loan amount is less than 5k, but the total account balance is more than 5k?

Thanks.

[Blinky the 3-eyed Fish]

Yes.

[Gilmore]

Thank you for responding.

[Gilmore]

Actually, that brings up another question which is a little unclear in my ERISA Outline...

If the balance in the account is greater than 5k but the vested balance is less than 5k, is spousal consent required. Once again assuming that this is a defined contribution plan.

Thanks.

[jaemmons]

I thought that if the portion of the total vested account balance being used as security for the loan did not exceed the plan's cashout limit of $5k (assuming it has been amended to change to the $5k) then no spousal consent is required.

Treasury Regulation 1.401(a)(20)- Q&A24

...Spousal consent is not required if the plan or the

participant is not subject to section 401(a)(11) at the time the accrued benefit is used as security, or if the total accrued benefit subject to the security is not in excess of the cash-out limit in effect under Sec. 1.411(a)-11T©(3)(ii)...

If the participant does not take a loan in excess of $5k, no spousal consent would be required.

[Gilmore]

And thus my confusion...

When they refer to total accrued benefit does it mean just the amount of the loan, or the total of the account balance? In the ERISA Ouline, in the discussion of loans and spousal consent, the word 'total' is underlined as if to emphasize it is the entire account balance.

Sorry to be dense.

[Blinky the 3-eyed Fish]

The way I read 1.401(a)(20)- A24 it does not contradict that you consider the total account balance (not loan amount) without vesting being a factor. And this makes sense if you parallel the situation to a partial distribution. The loan is not a distribution, but if not repaid it would effectively become one.

I think you would need spousal consent in this situation if the loan is less than 5k (with a > 5k balance), or if the vested balance is less than 5k but the total balance is greater than 5k.

[Gilmore]

Blink,

So I think you also answered my previous question...

For spoual consent you would consider the entire account balance, vested and unvested?

[Blinky the 3-eyed Fish]

Yes.

[Gilmore]

Ok, thanks for the info.

[Kirk Maldonado]

I think jaemmons is right.

Although the total account balance is taken into account in determining how much you can borrow, only half of it is pledged as security for the loan.

[Mike Preston]

I think there is a typo somewhere in Blinky's response. I will weigh in with Kirk and jaemmons.

[Appleby]

Originally posted by Gilmore

Actually, that brings up another question which is a little unclear in my ERISA Outline...

If the balance in the account is greater than 5k but the vested balance is less than 5k, is spousal consent required.  Once again assuming that this is a defined contribution plan.

Thanks.

Answer is no…Spousal consent is required if the plan balance serving as security exceeds $5,000. Given that only the vested balance can be used to pledge as security for a loan, the $5,000 is limited to the vested balance, not the entire balance.

[Blinky the 3-eyed Fish]

I found this on page 14.13 of the 2002 version of the ERISA Outline Book. Since you can't copy it, this is retyped.

"No spousal consent is required if the value of the total accrued benefit that is subject to the security interest is not in excess of the cash-out limit in effect under Treas. Reg. 1.411(a)-11©(3)(ii). See Treas. Reg 1.401(a)-20, A-24. For a defined contribution plan, the relevant value is the participant's account balance. For a defined benfefit plan, the relevant value is the present value of the participant's accrued benefit. Note that the total benefit is taken into account to determine if the $5,000 threshold is exceeded, not just the vested portion of that benefit. This is different frm the other consent requirements (see IRC 411(a)(11), for example), where only the vested interest is taken into account."

Both times "total" is mentioned it is underlined. (I couldn't get it to work here.) Also, Mike, where is my typo?

Addition: So the question is whether the whole balance is considered a security interest or not. I know my whole house is considered collateral for my mortgage, but that's not the best analogy.

[Gilmore]

Actually it is page 14.14 in the 2003 version and that is exactly what has led me to ask the original question.

Having said that, if Mike and the others are correct, please allow another dense question...

If the vested balance is 7k and the loan amount is 3k, does that make the total collateral 6k, meaning the 3k that is distributed and the 3k that must be available to allow the loan? Does that make the total collateral 6k and thus subject to spousal consent?

Thanks again.

[Mike Preston]

Blinky wrote: "I think you do would need spousal consent in this situation if the loan is less than 5k (with a > 5k balance), or if the vested balance is less than 5k but the total balance is greater than 5k."

I'm not sure what the first few words were meant to imply.

I guess it boils down to the phrase "total accrued benefit subject to the security is not in excess of the cash out limit...". I can understand that the IRS may have intended this to mean "total accrued benefit is not in excess of the cash out limit..." But they didn't. Sal's write up (which may be a reflection of IRS intent) is a reasonable interpretation of the regulation. The question is whether there are other reasonable interpretations.

[Blinky the 3-eyed Fish]

I reedited it to be clearer.